We Think Broader Market Weakness is Tremendous Opportunity to Buy A-Power (Nasdaq:APWR) Cheap

Sep 26, 2008
Author: SCP Editor

September 26, 2008 – We continue to pound the table on A-Power (Nasdaq:APWR) which closed yesterday at $12.15, having dropped since the beginning of September from $21.04. The company continues to report strong news, and growth – this morning announcing a new distributed power gen contract worth $195 million, and that its backlog for the power gen side of its business along is more than $800 million. And its wind energy business in China is heating up as well.

Today’s announcement: A-Power (Nasdaq:APWR) announced a new distributed power generation contract with $195 million, with the Jilin Glad Group. The two-phased project is expected to begin this month with the installation of a 24MW power station valued at $54 million. Completion of the first phase is estimated for October 2009. The second phase includes a 100MW distributed power generation system valued at $141 million and will begin in January with the completion date not yet announced. APWR’s distributed power generation backlog is now higher than $800 million, up from $650 million in August.

Management has reiterated its guidance for 2008 net income in the range of $35 to $45 million, and net income guidance next year for $70 million. Based on our assumption of $40 million in net income this year, at 9% net margins, we are forecasting top line revenue for the company this year at $430 million, which would represent top-line revenue growth of 182%.

We think that these metrics more than justify a 2.5x P/S multiple target for market cap based on sales, and at 15x P/E multiple target for market cap based on income. Using these metrics, we arrive at an implied trading range for the stock of $30 to $32.

We don’t think that our analysis is aggressive, when weighed against analysts that are following the stock. For example, Jesup & Lamont’s Brian Yerger recently wrote that “Visibility and confidence in our EPS estimate for 2009 is increasing and our premium multiple of 20 times our new 2009 EPS estimate of $1.95 from $1.96 values shares of APWR at $39 a share.”

To be sure, the broader market weakness will continue to be a drag on all sectors, but we think that the Asian region, which is where A-Power operates, will continues to grow and insulates the company from the volatility the U.S. is going through. In addition, the company’s offerings have the benefit of addressing strong secular trends in terms of the burgeoning China wind market, and that massive demand for energy efficiency throughout China and Asia in general.

At $11.77 this morning, holding a market cap of about $400 million, we remain extremely bullish on the stock and think the recent decline is more reflective of broader market weakness than any issues with the valuation and fundamentals of A-Power.

Disclosure Note: SCPEditor is LONG APWR. The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance.